Does the Proposed Bank Tax Adequately Compensate Taxpayers for the Risks?
The Wall Street Journal reported on January 15th that the major US banks are set to pay their employees record bonuses of approximately $145 billion for 2009. This staggering amount represents an 18% increase over bankers’ 2008 salaries. Wall Street tries to justify these huge bonuses by pointing out that there was an increase in bank revenues. The Journal projects that the top 38 banks and hedge funds generated about $449.6 billion in revenue for 2009, a 25% jump since 2007. Of course, Wall Street wouldn’t be earning any profits or revenues if not for government bailouts and capital injections. The Obama administration has paid attention to these record payouts and President Obama announced his proposal for a bank tax.
This tax would raise approximately $90 billion over ten years. In his comments, Obama told bankers, “I’d urge you to cover the costs of the [financial] rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling bank bonuses for top earners.” The tax, called the “financial crisis responsibility fee,” would force banks to pay back the loaned TARP funds and apply only to the sector’s largest firms, those with more than $50 billion in consolidated assets. Calculating this fee would involve taking the bank’s total assets and subtracting Tier 1 capital and deposits. This figure would then be subject to a 15 basis points fee.
Over the last two years, Washington has made it evident that it will not allow large financial institutions to fail. By placing a monetary responsibility (in the form of the bank tax) on the banks for this effective insurance, the Obama administration will hopefully deter the financial sector from over-expanding. The natural tendency of an industry in the face of government subsidy is to expand beyond the economic efficiency point. This tax will act to offset that implicit subsidy.
In essence, this tax asks banks to pay the government for the return to stability that the government’s actions ensured. Financial sector stability contributed largely to increasing profits at the banks, as did consolidation of large banks into even larger banks. As a result, the average employee at the 38 largest banks will earn $149,192, about $3,000 more than last year. This news will likely affect the already increasing populist sentiment among consumers and might prompt the government into further regulatory actions against banks.
The real question in many people’s minds is whether the tax is sufficient “repayment” for the trillion dollar bailout funded by taxpayers. Given the huge profits that have resulted from the bailout, the proposed tax appears to be but a drop in the bucket.
